Moody’s Investors Service has downgraded the credit rating of First Republic Bank to junk due to the “deterioration in the bank’s financial profile.” The bank’s debt rating was lowered to B2 from Baa1, with Fitch Ratings and S&P Global Ratings already downgrading the bank’s debt earlier in the week. The downgrade reflects the significant challenges First Republic Bank faces over the medium term due to deposit outflows, increased reliance on short-term and higher cost wholesale funding, and the high proportion of fixed rate assets at the bank. The bank is reportedly looking to raise money from other banks or private-equity firms by selling additional shares.
Important Details about First Republic Bank’s debt cut to junk by Moody’s –
– Moody’s has downgraded First Republic Bank’s credit rating to junk due to a deterioration in the bank’s financial profile.
– The bank’s debt rating was cut to B2 from Baa1 by Moody’s, while Fitch Ratings and S&P Global Ratings have also downgraded First Republic Bank’s debt.
– The downgrade reflects the bank’s increased reliance on short-term and higher cost wholesale funding due to deposit outflows, according to Moody’s analysts.
– First Republic Bank received a $30 billion deposit infusion from 11 major U.S. banks, but Moody’s believes the high cost of the bank’s borrowings combined with the high proportion of fixed-rate assets will negatively impact its core profitability.
– Shares of the company have plunged 80% from the close of trading on March 8 due to Silicon Valley Bank’s update on its business and a planned stock sale.
Moody’s Downgrades First Republic Bank to Junk
On March 17, 2023, at 10:26 p.m. ET, First Republic Bank’s credit rating was cut to junk by Moody’s Investors Service. Moody’s attributed the downgrade to deterioration in the bank’s financial profile. First Republic’s debt rating was lowered from Baa1 to B2. Fitch Ratings and S&P Global Ratings had already downgraded First Republic Bank’s debt earlier in the week, which signalled a decline in the bank’s financial stability. The rating downgrade reflected the “the deterioration in the bank’s financial profile and the significant challenges First Republic Bank faces over the medium term in light of its increased reliance on short-term and higher cost wholesale funding due to deposit outflows,” Moody’s analysts said in a release.
Moody’s Analyst’s Reflected Various Recent Developments in their Statement
Moody’s analysts referred to several issues the bank has been facing when issuing the statement. One of the recent developments cited is the institution’s disclosure that Federal Reserve borrowings ranging from $20 billion to $109 billion had been made within the previous week. According to Moody’s, the high cost of these borrowings, combined with the high proportion of fixed-rate assets at the bank, is likely to adversely affect First Republic’s core profitability in the coming quarters.
Furthermore, the agency noted that while news of the banking consortium’s deposit was positive in the short run, the longer-run path for the bank back to sustained profitability remains uncertain.
First Republic Bank Seeks Additional Funding to Boost Its Operations
Reports indicate that the bank is seeking to raise money from other financial institutions or private-equity firms by selling additional shares to stimulate its operations. First Republic lost 33% on Friday’s trading session despite receiving a $30 billion deposit infusion from 11 major U.S. banks.
Over the preceding week, the bank’s Federal Reserve borrowings ranged from $20 billion to $109 billion. According to Moody’s, these borrowings are relatively expensive, and the high proportion of fixed-rate assets coupled with the borrowings are likely to negatively impact First Republic’s profitability in the coming quarters.
Moreover, the majority of the bank’s clientele are high net worth individuals; as a result, the lender has increased its reliance on wholesale funding because of deposit outflows.
The Significance of the Moody’s Rating Downgrade
The rating downgrade shook investors’ confidence in First Republic, accompanied by a plunge in the company’s shares by 80% from the close of trading on March 8. Silicon Valley Bank’s plan to sell more stock and its update on its business spooked investors, leading to the decline that also continued with a 6% drop in the extended session on March 17. Earlier in the day, 11 large United States banks gave First Republic a deposit of $30 billion, but this infusion did not encourage the market.
Moody’s decision to place the bank’s rating under review for downgrade reflects the assessment that the bank has a significantly eroded deposit base, increased reliance on short-term wholesale funding, and a high volume of unrealized losses on its investment securities.
First Republic Bank has traditionally served wealthy clients; thus, its balance sheet concentrates on a large and profitable portfolio of jumbo mortgages, the debt of wealthy individuals, and commercial loans. This portfolio composition meant that the bank did not have a broad deposit base, unlike most traditional banks. The significant outflow of deposits, though not explicitly stated in public disclosures, inevitably led the bank to become increasingly reliant on wholesale borrowing.
The bank’s loan portfolio is highly concentrated, which amplified the risks of deposit outflows, and currently, the bank has not reduced this concentration. Hence, the bank will remain highly exposed to the risk of bad loans, especially considering the still-volatile real estate market. A decline in property values in affluent areas could result in an erosion of the value of the bank’s collateral as well.
So far, First Republic has relied on its balance sheet to manage its financial difficulties. The reported infusion of deposits from a consortium of large banks signaled that the bank has substantial connections in the US financial system, which will help mitigate its financial issues. Even so, the fact that the bank’s main clients are wealthy individuals raises concerns about the bank’s long-term financial stability.
In conclusion, Moody’s rating downgrade is a concern for First Republic Bank, signaling the deterioration of the bank’s financial situation. This decline came after Silicon Valley Bank’s disclosure and planned stock sale raised investor concern, further capping a disastrous week for two of Silicon Valley’s banks. The bank’s increasing reliance on short-term wholesale funding, the high cost of these funds, and a significantly eroded deposit base amplifies risk. Even though the institution has retained connections with large banks, wide margin deposits, and other potential sources of funds like private equity firms, concerns remain.